We are positive on the proposed 10% placement for the long run as bulk of the proceeds is to be used for capex and core business expansion with the balance for loan repayments and working capital purposes. Following that, we increased earnings estimates marginally, factoring interest cost savings and maintain our MARKET PERFORM call on the stock with lower TP of RM1.80.

Proposed private placement. Last Friday, UZMA proposed to issue up to 29.1m new ordinary shares, representing c.10% of its existing share at an issue price to be determined later. Note that the private placement does not require further approval given that the general mandate was approved at the previous AGM convened in 25th May 2016. The placement is expected to be completed by 3Q17.

For capex and loan repayment purposes. Assuming the placement shares are issued at indicative share price of RM1.74, which is less than 10% of the 5-day volume weighted average market price (VWAMP), UZMA could raise RM50.6m from the exercise. Bulk of the proceeds (c.59%) will be used for capex purposes followed by repayments of bank borrowings and working capital at 30% and 10%, respectively.

Positive in the long run. Although the placement would be shortterm EPS dilutive even after factoring interest cost savings of RM1.2m/annum, we believe the exercise is positive in the longer run as the fund is to be used for investment in equipment for its wireline, well drilling services and hydraulic workover unit businesses as well as for future development/investments. Meanwhile, it also helps to strengthen its financial position and lower its gross gearing of 1.3x as of 4Q16 to 1.1x.

Upgrade FY17-18E earnings marginally. Post private placement and loan repayments, we increase our FY17-18E earnings by 1%- 3% factoring interest cost savings. With the enlarged share base, FY17-18E EPS will be diluted by 8%-6% to 11.3 sen and 11.9 sen, respectively.

Maintain MARKET PERFORM. UZMA’s share base will be enlarged to 320.0m with the completion of the exercise which is slated to complete by 3Q17. We decide to roll over our valuation base year to FY18E, pegged to unchanged PBV of 1.1x, which is equivalent to -1.0SD over the 5-year mean. All in, we keep our MARKET PERFORM call on the stock with lower TP of RM1.80/share (from RM1.81 previously).

Risks to our call: (i) Weaker-than-expected recovery in O&G market, (ii) Slower-than-expected delivery in D18 Water Injection Project, and (iii) Lower-than-expected margins.

Source: Kenanga Research - 8 May 2017